Is a College Savings Plan the Perfect Gift for Grandkids?
As we enter the holiday season, we grandparents find ourselves wondering what to get the grandkids. This year, here is a suggestion that will have a lasting impact!
Is leaving a legacy important to you? While we are struggling to find the right gift for that special little grandchild, maybe we can step back for a moment. What might really benefit them and have our grandkids remember us by well into their future?
Giving the Gift of Education
I am talking about helping them with their future educational costs by participating in a College Savings Plan or 529 investment account. Almost every state in the United States has one or more programs that will allow you to make contributions into an investment/savings account that can grow tax free and be withdrawn tax free for college, vocational training and graduate school. These savings can be used for tuition, room and board, books, lab fees and other qualified expenses.
In addition, your contribution may also be tax deductible in the state in which the account is established. Each state has its own set of rules regarding the amounts that can be contributed each year and the amount that can be deducted from the state tax return (not federal tax). There is a federal limit on the amount that can be contributed under the annual gift tax exclusion; however, there is a way to maximize the amount by taking up to a five-year advance on the annual exclusion, up to $70,000 in one year.
Pre-Paid Tuition Plan in Virginia
For example, I live in Virginia and here is how it works for me. There are several types of savings and investment plans including a “pre-paid tuition” plan. The pre-paid tuition plan is a guaranteed plan that allows someone to pay for the cost of tuition while the child is younger and the state guarantees the cost of tuition to be paid in full if the student attends any of the state colleges or universities.
You can pay for one or more years, guaranteed regardless of the future increase in the actual tuition cost. For very young children I think this provides a base of security for the cost of higher education. The only drawback is if the child decides to go to an out of state school. In that case, the guaranteed benefit ceases and an equivalent amount based upon the average of the state’s tuition costs is provided to the student.
College Savings Plans
However, the other savings plans under the tax code of Section 529, provides an opportunity to invest into a college savings plan that is available to cover all qualified expenses regardless of where the child goes to school.
I like doing a combination of the guaranteed pre-paid tuition and the 529 investment accounts to cover as much of the cost as possible ahead of time. This way we have an amount that has a guaranteed benefit and a portion that will be subject to the investment market ups and downs. There are no other investment plans that can provide a state tax deduction and be tax free upon withdrawal. It’s hard to beat zero taxes!
Beneficiaries Can Be Changed
How is the money protected in the event a child does not go on to college? One additional benefit is that the monies that are “gifted” into the account are not the property of the child; the child is simply the beneficiary of the account. The custodian is usually the donor (grandparent) and the successor custodian is the parent of the child. The beneficiary can be changed to another sibling, parent or even to a first cousin. The custodian controls the account and names the beneficiary. By having a successor custodian, the account passes to the parent without going through probate.
For my grandchildren, I am not trying to pay 100% of the cost of higher education but an amount that will help reduce their dependency upon student loans. Each grandparent needs to evaluate what amount they can afford to contribute that will not cause any financial problems for themselves.
Having done these types of savings and investment plans for my clients I have found that the children are very appreciative of having a portion of their college expenses paid and it creates a special connection with the grandparent whether they are there or not at the time the child goes off to college.
I personally cannot think of a better investment than our grandchildren’s education!
Have you considered giving your grandchild the gift of education through a college savings plan or 529 investment account? Have you looked into any of the plans I mentioned? What options exist where you live? Please join the conversation.
Stan Corey is a CFP, ChFC and CPWA providing financial life management for more than 36 years. Stan has published a novel, The Divorce Dance, which is a story about a divorcing couple whereby the wife, Natalie, guides the reader though the divorce process and how to have a respectful divorce. Please visit his website.